The Judgment of the Court was delivered by

Ismail, J.:— The question referred to this court by the Income-tax Appellate Tribunal, Madras Bench, under section 256(1) of the Income-tax Act, 1961, for its opinion, relates to a claim of the assessee for deduction of a sum of Rs. 20,000 paid by it to the Congress Party as donation.

2. The Income-tax Officer who dealt with the matter at the initial stage pointed out that he was not able to follow as to how the said donation could be allowed as an “expenditure” as it was not incidental to the business. The Appellate Assistant Commissioner who disposed of the appeal preferred by the assessee stated that it was well-settled that donation to political parties cannot come in for allowance as business expenditure, and found that the action of the Income-tax Officer was justified. In the second appeal, the Tribunal pointed out that it heard the counsel for the assessee as well as the departmental representative who relied on the decision of the Calcutta High Court in Indian Steel and Wire Products Ltd. v. Commissioner of Income-tax [1968] 69 ITR 379 (Cal), to which we shall have occasion to refer further, and stated that according to that judgment, which discussed all the arguments for and against the claim, the amount could not be allowed as a deduction and that that was the view taken by the Full Bench of the Tribunal also. It was thereafter that the matter has come up before this court on a reference made by the Income-tax Appellate Tribunal.

3. The question that has been referred to this court is a simple one, viz.:

“Whether, on the facts and in the circumstances of the case, the sum of Rs. 20,000 is admissible as a deduction under section 37(1) of the Income-tax Act, 1961?”

4. As the question itself postulates, the claim has to be considered against the background of the statutory provision contained in section 37(1) of the Income-tax Act, 1961, corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922. section 37(1) of the Income-tax Act, 1961, states:

“Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ‘profits and gains of business or profession’.”

5. Consequently, the test for determining the deductibility is to find out whether the expenditure has been laid out or expended wholly and exclusively for the purpose of the business of the assessee in the present case. What exactly is the scope of this expression has been pointed out by the Supreme Court in Commissioner of Income-tax v. Malayalam Plantations Ltd. [1964] 53 ITR 140, 150 (SC). The Supreme Court observed:

“The aforesaid discussion leads to the following result: The expression ‘for the purpose of the business’ is wider in scope than the expression ‘for the purpose of earning profits’. Its range is wide: it may take in not only the day-to-day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business.”

6. It is against the background of this statement of law as to the allowability of a particular item to deduction under the statutory provision referred to above, the question raised in the present case has to be considered.

7. The question of donation to a political party has come up for consideration before almost all the High Courts in this country. There are very strong views in favour of and against the desirability of encouraging such donations. As a matter of fact, the Calcutta High Court in Indian Iron and Steel Go. Ltd., In re [1957] 27 Comp Cas 361, 364 (Cal) pointed out:

“To the cynic it appears to be a plea of the company to have a legal sanction to bribe the Government of the day, to induce policies that will help the company in its business. A company's policy should be determined by its shareholders who subscribe to its capital, and carried out by its board of directors, who manage the company. Such policy should, therefore, stand on its own merits and on the convictions and conscience of its shareholders. To induce the Government of the day by contributing money to the political funds of political parties, is to adopt the most sinister principle fraught with grave dangers to commercial as well as public standards of administration. The object is stated plainly to be ‘to contribute to the funds of politic???l parties which will advance policies conducive to the interest of the company’. Persuasion by contribution of money lowers the standard of administration even in a welfare state or democracy. To convert convictions and conscience by money is to pervert both democracy and administration. Its dangers are-manifold. Joint stock companies are not intended to be adjuncts to political parties and possible sources of revenue for these parties. They are statutory bodies working under statutory conditions for different purposes. Secondly, it will induce the most unwholesome competition between business companies by introducing the race, who could pay more to the political funds of political parties. In that competition business interest is bound to suffer in the long run. In the bid for political favouritism by the bait of money the company who will be the highest bidder may secure the most unfair advantage over its rival trader companies. Thirdly, it will mark the advent and entry of the voice of the big business in politics and in the political life of the country. The individual citizens although in name equal will be gravely handicapped in their voice because the length of their contribution cannot ever hope to equal the length of the contribution of the big companies. The man who pays the piper will then call the tune. The tune of political life, therefore, is liable in the long run to become the tune of the big trading companies and concerns. That will be bad both for business and for politics. It will be alike bad for public life as well as commercial life.”

8. Strong words, indeed, they are. But they are in consonance with commonsense. However, it is not necessary for the purpose of this case for us to decide whether contribution to political parties can be allowed as a deduction under section 37(1) of the Income-tax Act, 1961, under all circumstances. Almost all decided cases which have been brought to our notice have taken the view that even when a claim is made for deduction of a donation made to a political party, a nexus or link must be established between that donation and the business carried on by the donor. In view of this, we are assuming, for the purpose of this case, without deciding it, that in given circumstances a donation to a political party by a businessman can be allowed as a deduction under section 37(1) of the Act.

9. In J.K Cotton Spg. & Wvg. Mills Co. Ltd. v. Commissioner of Income-tax [1966] 62 ITR 813 (All), the assessee-company paid a sum of Rs. 56,000 to the Congress parliamentary board for its expenditure in the general elections and claimed it as a business expenditure on the ground that, with the changing pattern of the economic structure of society, it was in the interest of the company to keep the ruling party in power. The court, after referring to the finding of the Tribunal, pointed out ([1966] 62 ITR 813, 815 (All)):

“In these circumstances, the facts found do not indicate any nexus between this contribution to the Congress parliamentary board and expenditure incurred for the purpose of the business. When there is no direct nexus between the business of the company and this contribution, it appears to be impossible to hold that the assessee-company discharged the burden of proof which lay on it to show that this expenditure was wholly and exclusively for the purpose of the business.”

10. In Indian Steel & Wire Products Ltd. v. Commissioner of Income-tax [1968] 69 ITR 379, 395 (Cal), which has been referred to by the Tribunal, a Bench of the Calcutta High Court has considered this question very elaborately. The legitimacy, the morality and the business expediency of making a donation to a political party has been considered so thoroughly that it may be difficult to find an argument for or against the claim not mentioned in the judgment. Even in that case, the Calcultta High Court pointed out that it may be in given circumstances a donation to a political party may constitute an allowable deduction under section 37(1) of the Income-tax Act, 1961; but, on the facts which they considered, there was no connection or nexus between the donation the assessee had made and the business the assessee carried on. The court observed in that case (page 395):

“The fate of a political party in power depends on the support of public opinion, which is a deep sea of sentiment; with billowingly wavering surface. Public opinion changes. The circumstances of the world are so variable that there can be no irrevocable opinion. When this change of opinion reflects itself in the polls of an election, one party gives way to another party, until such time as history repeats itself. But so long as a political party remains in power, it has favours to show and patronages to distribute, which attract aspirants for favour and patronage. A short-cut to such favours and patronage is considered to be payment of money to party funds, because fund-hunger at party level is well known. In this country, where social controls over trade and industry are wide and varied, commercial men feel, for reasons good or bad, that their existence and prosperity depend upon Governmental graces. This feeling is not unreasonable. Since power of money is well known to commercial men and since they know best to exploit that power, large scale contributions to political party funds may at times be considered to be commercially expedient. Since commercial men are best experienced in commercial expediency”; we are prepared to proceed on the basis that some contributions to some political funds sometimes pay and prove to be expedient.

But although this is so, we are not prepared to proceed on the assumption that all contributions to all political funds must always be presumed to be commercially expedient. There may be some contributions made not in commercial interest or expediency but in order to save a commercial company from the consequences of unlawful acts, say, for example, to hush up a company law investigation or a proceeding for breach of foreign exchange regulations. Such contributions may also be made to satisfy a political fad or a political prejudice of the directorate of a company. Each case must, therefore, be decided on its own facts.”

11. In Orissa Cement Ltd. v. Commissioner of Income-tax [1969] 73 ITR 14 (Delhi) a Bench of the Delhi High Court had to consider the claim made by the assessee in that case for deduction of one lakh of rupees paid to the Congress party. In dealing with the claim, the court observed (page 17):

“While it is true that the expenditure incurred need not necessarily yield results or be incurred to directly benefit the business or be directly related to the earning of income, yet it must be incidental to the business and must be necessitated or justified by commercial expediency. Before an expense can be allowed under section 10(2)(xv), it must be directly and intimately connected with the business and be laid out by the taxpayer in his character as a trader. The assessee has to establish a direct and intimate connection between the expenditure and the business, i.e, between the expenditure and the character of the assessee as a trader. In short, only such expenditure can be allowed which is really incidental to the trade itself. An expenditure remotely connected with the trade does not qualify for permissible deduction.”

12. In that particular case, the Tribunal had recorded a finding that the payment had no connection with the business of the assessee; and in view of that, the court upheld the disallowance made by the Tribunal.

13. The decision of the Punjab and Haryana High Court in Ambala Bus Syndicate Private Ltd. v. Commissioner Of Income-Tax, Patiala [1974] 95 ITR 383 (Punj) deals with a case where the court allowed the deduction. In that case, the assessee was a transport company whose route permits were to expire on June 30, 1969. There was a threat of complete nationalisation of transport business and a Government notification was issued in this behalf in the Gazette of the State Government dated 19th November, 1969. The transport companies formed a forum, styled the Punjab Motor Union, to prevent nationalisation. All the transporters contributed funds to that forum and the forum donated money to different political parties. These parties exercised their weight with the Government and ultimately total nationalisation was prevented. The assessee got an extension of seven years for its route permits. The assessee had paid a sum of Rs. 10,000 to the Punjab Motor Union and claimed it as business expenditure. Its claim was negatived by the Income-tax Officer and the Tribunal. But the same was allowed by the High Court. The court pointed out that there was a clear connection between the contribution and the business of the assessee, because it got over the notification issued on 19th November, 1969, and that no other fact had been brought on record to show that something else intervened to make the Government change its decision and the assessee got an extension for seven years after expiry of its route permit and, therefore, the expenditure was wholly incurred to save the business from annihilation. It must be noticed that that case did not deal with a donation made to a political party directly, but dealt with a donation made to a union of transport companies styled the Punjab Motor Union.

14. The decision of the Bombay High Court in Commissioner of Income-tax v. Elphinstone Spinning and Weaving Mills Co. Ltd. [1975] 100 ITR 139 (Bom) dealt with a case of donation of Rs. 21,000 made to the Bombay Provincial Congress Committee. The object clause of the memorandum of association of the assessee-company permitted such donation. The court followed the decision of the Calcutta High Court in Indian Steel & Wire Products Ltd. v. Commissioner of Income-tax [1968] 69 ITR 379 (Cal) and the decision of the Delhi High Court in Orissa Cement Ltd. v. Commissioner of Income-tax [1969] 73 ITR 14 (Delhi) and negatived the claim for deduction.

15. Additional Commissioner of Income-tax v. Badrinarayan Shrinarayan Allodia [1975] 101 ITR 817, 820 (MP) is a decision of the Madhya Pradesh High Court, dealing with a claim for deduction under section 37(1) of the Income-tax Act, 1961, in respect of a donation made to the Chief Minister's Drought Relief Fund. The claim of the assessee was that the assessee was compelled to make the donation in return for the grant of an export permit and, therefore, the donation made by it was deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922. The High Court accepted the finding of fact arrived at by the Tribunal, namely, that the donation was only voluntary and proceeded to deal with the claim on that basis. As a matter of fact, in relation to the claim of: he assessee that the donation was compulsory, the court observed:

“……on the assessees' own contention that the donations were compulsory and as a condition precedent to the grant of permit, the assessees would have no case. If that had been the position, the permits including the donations, would have been vitiated as being opposed to public policy and, therefore, void under section 23 of the Indian Contract Act.”

16. On the basis that the donations were only voluntary, the High Court, following the decision of the Calcutta High Court and the Delhi High Court referred to already, held that the donations were voluntary, that there was no connection between the donations and the business of the assessee and that, therefore, the donations could not be allowed as deductions.

17. It is against the background of these decisions we have to consider the present case. In the present case, there is not an iota of material to show what was the nexus or link between the donation and the business of the assessee. The assessee is a private limited company carrying on business in bus transport at Pudukottai. The claim for deduction was made for the assessment year 1962-63, the previous year being the year ending March 31, 1962. From the records placed before the court there is absolutely no material to show what was the advantage or the benefit which the assessee intended to obtain by making the donation and for what purpose the assessee made the donation with reference to its business interests. Apart from the bald claim that the donation made to a political party cannot be disallowed, the assessee has not established that the donation made by it to the political party in question constituted an item of expenditure laid out solely and exclusively for the purpose of its business. In other words, the link or the nexus between the donation and the business of the assessee not having been established, the assessee is not entitled to claim the amount in question as an allowance or deduction under section 37(1) of the Income-tax Act, 1961.

18. Under these circumstances, we answer the question in the negative and against the assessee. The assessee will pay the costs of the Commissioner. Counsel's fee is fixed at Rs. 500.